Linde vs. Sherwin-Williams: Which Chemical Stock is a Better Buy?

Linde plc (LIN) and The Sherwin-Williams Company (SHW) are two leading players in the specialty chemicals industry. Based in Guilford, U.K., LIN is an industrial gas and engineering company that offers atmospheric gases and process gases (carbon dioxide, hydrogen, helium, electronic and specialty gases, acetylene) internationally. It also designs and builds equipment that produces industrial gases primarily for internal use and offers customers a range of gas production and processing services. In comparison, SHW in Cleveland, Ohio, develops, manufactures, distributes, and sells paint, coatings, and related products. It serves retailers, dealers, jobbers, licensees, and other third-party distributors through its branches, direct sales staff, and outside sales representatives.

The United States is the world leader in chemical production and exports, accounting for 18% of the global chemical shipments. Rising demand for specialty and commodity chemicals upon the resumption of industrial and construction activities has been driving the chemical industry’s growth. In addition, spending from the bipartisan Infrastructure bill passed last fall should support domestic production. Furthermore, the industry is well-positioned to overcome the challenges posed by rising input costs and supply chain issues. And the efforts of chemical companies to achieve decarbonization and sustainability goals should brighten the industry’s long-term prospects. The global specialty chemicals market is expected to grow at a 6.2% CAGR to $894.14 billion by 2028. So, both LIN and SHW should benefit.

But while SHW shares have declined 5.3% in price over the past nine months, LIN has surged 1.6%. LIN is a clear winner with 21.2% gains versus SHW’s 10.7% returns over the past year. But which of these stocks is a better pick now? Let’s find out.

Latest Developments

On Feb. 8, 2022, LIN signed a long-term agreement with BASF SE (BASFY), a German multinational chemical company, to supply hydrogen and steam. Expected to begin onstream in the first half of 2024, LIN will design and operate an additional hydrogen production facility at Chalampé, France, which will effectively double its current capacity in the region and supply to BASFY's new hexamethylenediamine (HMD) manufacturing facility. This will help LIN nurture a long-term partnership with BASFY.

On Feb. 8, 2022, SHW signed an agreement with North Carolina, Iredell County, and the city of Statesville to invest $300 million and significantly expand its architectural paint and coatings manufacturing capacity and establish a larger distribution facility in Statesville, N.C.  This investment will help SHW meet the growing customer demand in the region.

Recent Financial Results

For its fiscal 2021 fourth quarter, ended Dec. 31, 2021, LIN’s sales increased 14.1% year-over-year to $8.30 billion. The company’s adjusted operating profit came in at $1.84 billion, up 14.1% from the prior-year period. Its adjusted net income came in at $1.43 billion, indicating a 17.6% year-over-year improvement. LIN’s adjusted EPS increased 20.4% year-over-year at $2.77. The company had $2.82 billion in cash and cash equivalents as of Dec. 31, 2021.

SHW’s net sales for its fiscal 2021 fourth quarter, ended Dec. 31, 2021, increased 6.1% year-over-year to $4.76 billion. The company’s gross profit came in at $1.88 billion, indicating an 11.7% year-over-year decline. Its pre-tax income was $308.90 million, down 38.7% from the year-ago period. SHW’s net income was$304 million for the quarter, representing a 25.3% decline from the year-ago period. And its adjusted EPS decreased 21.2% year-over-year to $1.34. As of Dec. 31, 2021, the company had $165.70 million in cash and cash equivalents.

Past and Expected Financial Performance

LIN’s revenue and EBITDA have increased at CAGRs of 27.6% and 35.9%, respectively, over the past three years.

Analysts expect LIN’s EPS to rise 9.8% year-over-year in its fiscal year 2022, ending Dec. 31, 2022, and 9.6% in fiscal 2023. Its revenue is expected to grow 7.3% year-over-year in fiscal 2022 and 5.7% in fiscal 2023.

In comparison, SHW’s revenue and EBITDA have grown at CAGRs of 4.4% and 9.5%, respectively, over the past three years.

SHW’s EPS is expected to rise 16.9% year-over-year in its fiscal year 2022, ending December 31, 2022, and 17.8% in fiscal 2023. Its revenue is expected to grow 9.1% year-over-year in fiscal 2022 and 5.9% in fiscal 2023.

Valuation

In terms of non-GAAP forward PEG, SHW is currently trading at 2.21x, which is 23.5% higher than LIN’s 1.79x. In terms of forward EV/EBITDA, LIN’s 15.19x compares with SHW’s 21.14x.

Profitability

LIN’s trailing-12-month revenue is almost 1.5 times SHW’s. LIN is also more profitable, with a 43% gross profit margin versus SHW’s 42.8%.

Furthermore, LIN’s 33%, 12.4%, and 19.8% respective EBITDA margin, net income margin, and levered free cash flow compare with SHW’s 16.2%, 9.4%, and 7.4%.

POWR Ratings

While LIN has an overall B grade, which translates to Buy in our proprietary POWR Ratings system, SHW has an overall C grade, equating to a Neutral. The POWR Ratings are calculated by considering 118 distinct factors, each weighted to an optimal degree.

Both LIN and SHW have a C grade for Momentum, in sync with their mixed price performance over the past year. LIN has lost 2.3% over the past six months, while SHW lost 11%.

LIN has a B grade for Stability, which is consistent with its lower volatility compared to the broader markets. It has a 0.86 beta. SHW’s C grade for Stability represents its slighter higher volatility. SHW has a 1.14 beta value.

Among 90 stocks in the A-rated Chemicals industry, LIN is ranked #32.

SHW is ranked #31 of 61 stocks in the C-rated Home Improvement & Goods industry.

Beyond what we have stated above, our POWR Ratings system has also rated LIN and SHW for Value, Sentiment, Growth, and Quality. Get all LIN ratings here. Also, click here to see the additional POWR Ratings for SHW.

The Winner

Surging demand for chemical products should allow LIN and SHW to grow in the coming months. However, we think its higher profitability and lower valuation make LIN a better buy here.

Our research shows that the odds of success increase if one bets on stocks with an Overall POWR Rating of Buy or Strong Buy. Click here to access the top-rated stocks in the Chemicals industry, and here for those in the Home Improvement & Goods industry.

LIN shares were trading at $293.12 per share on Tuesday afternoon, down $9.74 (-3.22%). Year-to-date, LIN has declined -15.39%, versus a -9.21% rise in the benchmark S&P 500 index during the same period.

Sweta is an investment analyst and journalist with a special interest in finding market inefficiencies. She’s passionate about educating investors, so that they may find success in the stock market.

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